November 30, 2012

Devil in the Details: IPSs need specific criteria when it comes to TDFs

In reviewing investment policy statements (IPSs) of 401(k) and 403(b) plans, I have observed that many lack specific criteria for the selection and monitoring of target-date funds (TDFs), or, if there are criteria, that they are overly broad and not particularly helpful to plan committees. While there are no clear legal guidelines to direct this process, the following are, at the least, good practices:

  • An IPS should require that the committee evaluate the expenses for the TDFs and the underlying investments.
  • The IPS should describe the desired asset allocation.
  • The IPS should describe the desired glidepath (changes in the asset allocation) for the TDFs as they approach the targeted dates.
  • The IPS should have a provision about evaluating the mutual funds in the target-date fund and the benchmark for monitoring the fund’s performance.
  • The IPS should provide that the investment management firm has the expertise to reasonably and prudently select the underlying investments.


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